This resource is for anyone wanting to learn more about a variety of federal and state tax issues. All entries are written and posted by Jim, a former IRS Agent and Large Case Audit Team Coordinator who worked in the Service for 19 years. Jim is also a CPA (NC #25093).

Jim offers free IRS assistance for all post-filing issues and IRS matters. Please feel free to reach out to him at his CPA services website, www.buttonowcpa.com.

The core mission of IRSMind is to help people understand and solve tax problems. We believe that most can solve their own IRS problems if IRS functions and operations were more transparent. We aim to provide that knowledge. Transparency is the key to understanding - and understanding is the key to efficient and effective action.

Feb 1, 2012

On Jan. 20, the IRS released a memorandum (SB/SE 05-0112-013) to its collection employees, formally implementing policy changes to the streamlined installment agreement. These changes come with a new Form 9465-FS, Installment Agreement Request, released last month by the IRS but without any guidance.

According to the form’s instructions, individuals with unpaid liabilities of more than $25,000 and less than $50,000 can use this form to request an IRS direct debit installment agreement to full pay the tax liability within 72 months or within the collection statute of limitations, whichever is shorter.

With this form, the IRS changed the threshold for this type of agreement from $25,000 to $50,000, which will allow the IRS to process the agreements faster. Taxpayers can also avoid filing a detailed financial statement and supporting documentation.

For new balances filed this year, you can attach the paper Form 9465-FS to the front of the tax return. For existing balances, you can mail the form directly to the IRS.

On Jan. 26, the IRS also modified its online payment arrangement (OPA) application at IRS.gov to allow for taxpayers to request installment agreements for balances of up to $50,000. The current application allows for balances of up to $25,000 and payment terms of up to five years.

If your client cannot pay the tax in full within the prescribed period or doesn’t want a direct debit installment agreement, you must submit Form 433A (long form, Collection Information Statement for Wage Earners and Self-employed Individuals) or Form 433F (short form, Collection Information Statement), along with supporting documentation to substantiate your client’s ability to pay.

Taxpayers can also avoid a federal tax lien for balances up to $50,000. Previously, the IRS was required to make a lien determination, and often filed a lien, when a taxpayer owed more than $25,000. As expected, under the new rules, taxpayers who owe less than $50,000 and are in direct debit installment agreements to full pay the taxes owed will not have a tax lien filed.

Beyond415 stays current with the latest IRS changes and has updated its IRS Practice System with the new Form 9465-FS.

Jan 17, 2012

While most of us were celebrating the holidays, the IRS was making changes to its systems, processes and forms.

This year, the IRS made a significant change to how it will collect unpaid balances from individuals and people paying certain business tax liabilities who owe between $25,000 and $50,000. These changes will affect how tax practitioners help their clients with IRS collection issues.

On Dec. 31, 2011, the IRS released Form 9465-FS, Installment Agreement Request. Individuals with unpaid liabilities of more than $25,000 and less than $50,000 can use this form to request an IRS direct debit installment agreement. The IRS changed the threshold for this type of agreement from $25,000 to $50,000, which will allow the IRS to process the agreements faster. And taxpayers won’t be required to attach supporting documentation if they agree to pay the balance owed within 72 months or within the collection statute, whichever is earlier.

Types of Agreements

Internal Revenue Code Section 6159(a) allows the IRS to establish written agreements for taxpayers to pay their full or partial tax balances in installments. Administratively, there are three types of IRS installment agreements for individual taxpayers:

Guaranteed Installment Agreements

Balance: $10,000 or less

Timeline: Pay the balance in three years or less, collection statute permitting

Financial statement/supporting documentation: Not required

Other requirements: Must have filed and paid on time for the past five tax years without having established an installment agreement to pay

Streamlined Installment Agreements

Balance: $25,000 or less

Timeline: Pay the balance in five years or less, collection statute permitting

Financial statement/supporting documentation: IRS customer service representatives and collection personnel routinely accept these agreements with Form 9465, Installment Agreement Request; via online payment arrangement (OPA) submissions; or by phone without the taxpayer having to provide a financial statement and supporting documentation.

Other requirements: Must have filed all past tax returns and made corrections to withholding and/or estimated taxes

Negotiated Installment Agreements

Before the IRS recently released Form 9465-FS, any taxpayer who couldn’t pay and owed more than $25,000 had to provide a financial statement and supporting documentation to request a negotiated installment agreement. Under this type of arrangement, IRS collection personnel review the financial statement and payment proposal to determine the taxpayer’s ability to pay immediately with liquid assets or loan capabilities, and with monthly installment payments.

For individuals, the IRS uses collection financial standards to limit living expenses for food, clothing, out-of-pocket medical costs, housing and utilities, and transportation. Taxpayers are regularly held to these standards unless they can show hardship or other circumstances that warrant exceeding the limits.

2012 Brings New Rules

With the new Form 9465-FS, taxpayers who owe more than $25,000 and less than $50,000 can avoid filing a detailed financial statement and supporting documentation. They can instead submit a direct debit installment agreement request to full pay the tax liability within 72 months or within the collection statute of limitations, whichever is shorter.

For new balances filed this year, you can file the paper Form 9465-FS and attach it to the front of the tax return. For existing balances, you can mail the form directly to the IRS.The IRS also plans to modify its online payment arrangement (OPA) application at irs.gov to allow for taxpayers to request installment agreements for balances of up to $50,000. The current application allows for balances of up to $25,000 and payment terms of up to five years.

If your client cannot pay the tax in full within the prescribed period or doesn’t want a direct debit installment agreement, you must submit Form 433A (long form, Collection Information Statement for Wage Earners and Self-employed Individuals) or Form 433F (short form, Collection Information Statement), along with supporting documentation to substantiate your client’s ability to pay.

Despite the increased threshold for this agreement, it doesn’t appear that the IRS has altered its procedures related to filing federal tax liens. Procedurally, the IRS automatically files a tax lien if a taxpayer owes more than $25,000, even if the taxpayer is in an installment agreement to pay the taxes in full. The IRS does this to protect its interest and enforce compliance. Many IRS practice and procedure experts expect the IRS to relax internal rules related to filing liens for those who owe less than $50,000 and are in direct debit installment agreements to full pay the taxes owed.

What’s next?

With the total amounts in IRS collection up 183% over the past 10 years, the IRS must look for additional ways to collect past-due balances. The new Form 9465-FS may allow taxpayers with balances over the IRS streamlined threshold to achieve more manageable payment plans and avoid extensive financial disclosure and interaction with the IRS. But don’t count on the IRS to immediately provide further relief on filing tax liens.

The tax lien is still the IRS’ most effective collection tool. If your client cannot pay his or her balances owed and wants to avoid a lien, get the balances under $25,000 and enter into a streamlined installment agreement before entering IRS collection.
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Apr 11, 2011

In an effort to decrease the widening national debt and tax gap, the General Accounting Office is recommending that Congress and the IRS consider revoking and denying passports to those who owe tax debts to the Federal government.

With the Nation’s debt approaching $14 trillion and the tax gap, in 2001 numbers, at $345 billion annually, the GAO is recommending using trusted debt collection methods to collect on past due tax debts. Currently, the Department of State currently screens passport holders and applicants for past due child support. Since 1998, over $200 million has been collected on overdue child support payments. The GAO thinks the IRS can collect even by setting up a collection function in the international terminal at the airport.

How much can be collected from denying and revoking passports?

The GAO estimates that at least 1% of all passports issued in 2008, or 224,000 Americans, owe back taxes. The total owed: in excess of $5.8 billion. The GAO studied just the 2008 passports issued and suspects that there is substantially more in unpaid taxes from these individuals, especially because those who owed also had significant unassessed liabilities due to unfiled tax returns. The GAO only studied passport activity for one year. They suspect a multi-year investigation would find even more debtors passing through the airport checkpoints.

Other GAO findings

The GAO also selectively looked into several tax debtors/internation passengers to get a clear picture of potential abusive and criminal tax activity. What they found was startling. The GAO found that abusive and criminal tax debtors were passing freely past United States borders, without consequence. Even more alarming was that the IRS was not pursuing several of them for their unpaid taxes. In a selected sample of 25 debtors who were issued passports and owed:

two had worked under State Department contracts

six of the 25 were or are under criminal investigation by the IRS

ten had prior federal indictments or convictions

GAO’s proposal

The GAO recommends that the IRS, Congress and the Executive Branch study the possibility of collecting taxes through the State Department and the Passport Denial Program. The IRS already successfully collects back child support, unpaid social security repayments, and overdue student loans through garnished refunds via the Treasury Offset Program. Why not turn it around and let other agencies collect back taxes. The IRS already levies tax debtors through the Federal Levy Payment Program that collects back taxes through the Social Security Administration and the federal payments system.

The Problem: IRS taxpayer privacy limitations

The IRS is effective in taking information from other governmental agencies. However, under section 6103 of the Internal Revenue Code, it is limited in what it can disclose to others. The GAO points out that taxpayer information cannot be shared with outside agencies, except as allowed by law. Generally, this disclosure has been limited to sharing certain tax information with State taxing authorities for tax administration and child support enforcement. For the most part, the IRS cannot disclose tax information without the consent of the taxpayer.

The GAO pointed out that the IRS could not even disclose sensitive taxpayer information on those tax debtors working for the State Department, even though these individuals may be performing sensitive work requiring security clearances. Two individuals who were studied were actually committing identity theft on deceased individuals. The IRS was even precluded from disclosing these names to the State Department directly.

The Answer

Step #1: Change section 6103 to allow the IRS to share information with the State Department.

Step #2: Engage IRS collections through the Passport Denial Program

The GAO concluded that the IRS, Congress and the Executive Branch should consider overcoming the section 6103 hurdles and start collecting through the State Department. The GAO stated: if Congress is serious on collecting the $330 billion in unpaid federal taxes, change the law that restricts the IRS from collecting on those with passports. Then, use the information to collect through the Passport Denial Program.

What’s next?

This is a realistic proposal from the GAO. With the IRS looking for creative collection alternatives, it is quite likely that they will consider this option. Consider that the IRS has been using several alternatives lately, from pressing former tax havens to share tax information to help with tax administration to requesting outside collection agencies (albeit unsuccessful) to collect for the IRS. The IRS is also getting pressure to use outside information to collect on more government contractors that owe debts.

Clearly, with a growing national debt, collecting tax debt from those getting screened at the airport would be an efficient use of government resources. The government could use existing technology and information systems without much additional cost – a win-win situation.

My prediction: look for legislation soon and for the IRS to start collecting taxes through the Department of State. With more demands to collect taxes and no additional resources in the foreseeable future, the IRS must use current information systems and government programs to close the tax gap.

Apr 6, 2011

Each year, about 20 million taxpayers owe taxes when they file their tax return. On September 30, 2010, the number of taxpayers with serious tax delinquencies grew to over 10 million.

With the economy only marginally better and unemployment still at recession levels, the trend looks to continue.

What can you do if you owe on April 15th? Here are 8 consumer tips that you should follow to save you money and ensure that you do not become a tax debtor again.

#1: Whatever you do, save up to 25% by filing on time. The absolute worse reaction to finding out you owe on your tax return is to not file your return on time. The penalty is 5% per month, up to 25%, for filing late. If you owe $2,000 on your return, that penalty amounts to $500. If you file on time, you will only be charged a small failure to pay penalty and interest on the accrued balances.

#2: Get a payment plan with the IRS- it’s easy to set up.

The IRS has basically three payment plans. Most qualify for the two simple payment plans and they are dirt simple to set up. In fact, 94% of all IRS payment plans are these two payment plans. Here they are:

Simple payment plan #1: the “guaranteed installment agreement” – the “GIA” is for those taxpayers who owe less than $10,000, can pay in the full balance in three years, and have a clean compliance history (no payment plans and all tax returns filed for the last 5 years). Over 87% of taxpayers who owe have a balance under $10,000- in fact, 3 out of 4 taxpayers owe less than $3,000. For the person who owes $3,000, that is a payment under $100 a month.

Simple payment plan #2: the “streamlined installment agreement” – the “SLIA” is for those who owe under $25,000. It allows for the payments to be made over 5 years. The IRS’ minimum monthly payment as the assessed balance divided by 50. This allows for accruals of the failure to pay penalty and interest. For someone who owes $20,000, the payment plan would be a minimum of $400 a month.

The third type of payment plan is a “negotiated payment agreement” based on the amount you owe and your ability to pay. In this case, you would have an amount owed over $25,000 or you would not be able to qualify for a GIA or SLIA. In these rare cases, you will have to provide a financial statement to the IRS and work out payment terms. If you have to go this route, go to a local IRS office and speak with a representative to get your best results. Bring all of your receipts for all of your expenses, bank statements and proof of income for the past three months.

#3: Save money and time and set up a payment plan online. The IRS has made it easy for these taxpayers to get a payment agreement. You can do it by mail via Form 9465 or online using the Online Payment Agreement on the IRS website. Last year, over 61,000 taxpayers set up an online payment arrangement, avoiding the long IRS phone wait times or professional fees in using an accountant if you are tentative about talking to the IRS yourself.

#4: Set up a direct debit payment agreement. It saves $53 and greatly reduces your chances of default. The IRS charges $105 for a payment agreement. However, if you set up a direct debit agreement, the fee drops to $52. Also, because the IRS requires you to pay an amount each month (you cannot prepay next month), you should set up a direct debit agreement to avoid default. Over 40% of all payment agreements are defaulted by the IRS- many due to late arriving payments. Defaults require another IRS contact, intrusive questions, and a $45 reinstatement fee. Avoid all of this mess by setting up a direct debit agreement.

#5: If you cannot pay anything now, ask for 120 days to pay. Sometimes all you need is a few months to pay. The IRS will give you 120 days to pay the amount in full. The cost for a 120 day extension - nothing. If circumstances change within the 120 days, you can always inform the IRS of the change in your finances and set up a GIA or SLIA, with no questions asked. Interest will continue to accrue during this time, but it may give you time to get the funds to pay.

#6: The IRS gives cheap loans- the interest rate is currently 4%. Each quarter the IRS sets the interest rate that they will charge on underpayments. Currently it is 4% and has been that low or lower for over a year. The IRS does charge a failure to pay penalty for all balances due. However, if you get into a payment plan, this penalty is 0.25% per month – or 3% per year. That is an annual interest and penalty rate of 7% - not bad for any consumer loan.

#7: Do not fall for those late night ads for “pennies on the dollar” tax relief. These commercials taught the little-used tax relief program called the “Offer in Compromise” program. To illustrate how little it is used: last year, out of the approximately 20 million taxpayers who filed and had a balance due, only around 14,000 were accepted. Also, the average amount paid in an “Offer” was over $9,000 in 2010. These tax relief firms charge $3,000 or more for what is rarely available. Don’t make matters worse by buying an expensive gamble.

#8: Stop from owing again – change your withholding or start making estimated tax payments. If you owe for the first time or continually find yourself owing each year, change your withholding using a Form W-4 or start making estimated tax payments quarterly to stop the annual cycle of “file and owe.” Next April 15th you will be glad you did.

If you owe Uncle Sam on April 15th, don’t be paralyzed. File on time, pay if you can or make arrangements to pay, and make sure it does not happen next year by changing your withholding. Follow the 8 tips outlined here and save yourself money and time.

Apr 1, 2011

AARP is under the fire again over whether is a legitimate tax-exempt organization or just a disguised for-profit company.

Specifically, AARP is under attack for receiving $657 million in royalty revenue from insurance contracts in 2009.

There is a history here. In the last decade, AARP and the IRS disputed the taxability of some of the same proceeds, i.e. was the royalty income received by AARP for such contracts actually related to their "exempt purpose" - i.e. advocating for senior citizens. The IRS settled the case with AARP, who agreed to restructure and move business services to a for-profit subsidiary. In the deal, the IRS agreed that the insurance services were royalty income, which was exempt from "unrelated business income tax" - i.e. the tax paid by tax-exempts for running for-profit businesses.

Tax-exempts can have unrelated business activities. However, it cannot be substantial. If the activity is substantial, the tax-exempt loses its status.

On April 1, 2011, the CEO of AARP, Barry Rand, provided his defense of AARP's extensive insurance business operations. At a highly contentious joint hearing by the House Ways and Means Health Care and Oversight subcommittees, he stated in defense of AARP that all of the funds used by the royalties go back into the mission and purpose of AARP. While that is true, it is not a very good defense. Mr. Rand is essentially stating that the "destination of the funds" determines whether the activities are tax-exempt. Prior to the Revenue Act of 1950, Mr. Rand would have had a position. Tax exempt organizations could raise income in a for-profit manner as long as it was used for a charitable purpose- i.e. the "destination of funds" test.

However, one can see the absurdity in this rule and eventually Congress changed the rule in 1950. What was born was the concept of "unrelated business income" - i.e. income whose source was not tax-exempt but rather in the form of a for-profit business. However, specifically exempted from the tax was several passive activity income sources such as certain rents and royalties. Removing the "destination of funds" test makes perfect common sense - if not, for-profit businesses would be put at a significant disadvantage to their tax exempt counterparts performing the same for profit activity but have no resulting taxes.

AARP may be exempted from paying taxes on the income, but they still have to explain their primary activities- which is still the test for tax exemption. As my friends at the IRS would say - "just follow the money and it will tell you their purpose."

That leads us back to Mr. Rand's testimony today. What is AARP's primary purpose??? Mr. Rand should be answering that question. When your membership dues increase 32% in 7 years but your royalty income triples, you have some explaining to do about your true activities.

Surely, there are many companies out there who are put at a disadvantage from AARP's activities. Maybe the two Republicans who started this inquiry got an ear full from them. Today they did not get a good explanation from Mr. Rand. The "ends justify the means" argument will not bear well for your organization's tax exempt status.

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To comply with requirements imposed by the United States Treasury Department, any information regarding any U.S. federal tax matters contained in this communication and website is not intended or written to be used, and cannot be used, as advice for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.